Do Industrialized Countries Hold the Right Foreign Exchange Reserves?
10 Pages Posted: 3 Apr 2013
Date Written: April 2013
That central banks should hold foreign currency reserves is a key tenet of the post-Bretton Woods international financial order. But recent growth in the reserve balances of industrialized countries raises questions about what level and composition of reserves are “right” for these countries. A look at the rationale for reserves and the reserve practices of select countries suggests that large balances may not be needed to maintain an effective exchange rate policy over the medium and long term. Moreover, countries may incur an opportunity cost by holding funds in currency and asset portfolios that, while highly liquid, produce relatively low rates of return.
Keywords: foreign currency, industrialized countries, foreign exchange reserves
JEL Classification: F30, F40
Suggested Citation: Suggested Citation